Earlier this year the UK government announced a number of changes in the personal injury claims market which was seen as a way of reducing the cost of processing claims while bringing up-to-date the way in which long-term claim awards were calculated. The idea was that the increase in the Ogden rate would be offset by cost savings in processing smaller claims, together with new payout limits, even if the insurance companies did not agree. While focusing on the Ogden rate the insurance companies are now starting to fight back with a pre-emptive increase in insurance premiums.
Consumers Starting To Pay The Price
Even though the changes by the government were at worst supposed to be cost-neutral to consumers, insurance companies are now starting to increase their premiums. Direct Line has already confirmed that average motor insurance premiums increased by 6.6% in the first three months of 2017 with significantly greater increases for supposed “high-risk policyholders” such as young drivers. Even though an average 6.6% increase may seem relatively small when looking at the bigger picture, it is well above inflation and for those struggling to cover their car insurance premiums, it will make a difficult situation even worse.
What is interesting is that Direct Line has confirmed there has been little impact on trading in light of the recent changes to the way in which personal injury claims are processed and calculated. While there is no doubt that long-term costs will increase for the insurance sector, in particular where the Ogden rate is used to calculate payments relating to life-changing long-term injuries, why have the insurance companies seemingly jumped the gun?
Anticipating Claims Inflation
We all know that financial markets eventually recalibrate themselves when major changes are afoot but quite how Direct Line has been able to “anticipate” an average 6.6% increase in car insurance premiums is difficult to understand. We know that insurance companies have complicated financial models which can forecast future costs and payouts with relative accuracy. However, the recent changes in the personal injury claims market have left many people in the dark as to their impact in the short, medium and longer term.
This must be a worst-case scenario for the UK government because while the changes were seen as “cost neutral” already there is an average 6.6% increase in car insurance premiums for Direct Line customers. This will open the door for other companies to follow suit with Admiral Insurance also looking to increase premiums in the short term and recoup an estimated £150 million impact from the change in the Ogden rate. There is no doubt other companies will also increase their premiums and now that Direct Line has already broken cover this will make it far easier for them to follow suit.
Shopping Around For Insurance Cover
Unfortunately, motor insurance will take the majority of the burden in terms of increased premiums in the short, medium and long term with both Direct Line and Admiral already confirming this. It will be interesting to see how many UK consumers now look to shop around for their insurance coverage because historically many have been “lazy” – preferring to stay with the same insurance company for many years. This is despite the fact that there is renewed competition in the insurance market and if you look towards a specialist insurance company there is every chance you could reduce your monthly or annual insurance premiums.
There are many different ways in which you can check out the insurance market including comparison websites although they may not cover all insurance services. It may well be sensible to make use of various online premium calculators to work out an estimated premium for your particular situation and see which companies best suit your requirements. Over the coming months, we could also see some relatively subtle changes in small print which would change the terms of your insurance coverage and perhaps lead to an increase in customer liabilities in the event of a successful claim against them.
Is The Scope For Further Change?
In many ways, the UK government tried to railroad the insurance industry and curry favour with consumers with regard to personal injury claims payments. Initially, headlines were very positive for the UK authorities and consumers were relieved to see insurance companies taking on more of the “financial burden”. Unfortunately, this positivity has not lasted long as even before the likes of Direct Line have even seen a change in trading and personal injury claim settlements they have already decided premiums need to rise – with particular emphasis on the motor insurance sector.
We may well see some additional tweaks to the personal injury claims market in the medium to long term. However, unless the UK government is willing to either reduce insurance premium tax, or cap annual premium increases, the insurance companies would appear to have grabbed the initiative for now.
Were Recent Personal Injury Claims Changes Necessary?
Whether or not the UK government has gone about changes in the personal injury claims market the right way is debatable but there is little doubt that changes were long overdue. Prior to the changes the Ogden rate related to a financial environment which bears little or no resemblance to that of today. The cost of processing relatively small personal injury claims was dominated by legal costs which were then passed on to consumers. This is before we even begin to look at the issue of fraudulent personal injury claims and ways to combat this.
While we know what the changes to the personal injury claims process and award system are, and we are now aware of the new Ogden rate, what will be interesting is to see is whether these recent changes reduce the number of fraudulent personal injury claims. If the potential rewards in question are lower and the use of legal aid further limited then this does begin to squeeze the criminal gangs who will in some cases need to take on their own legal costs. This in itself could have a major impact on the personal injury claims market but it will take some time to filter through in terms of claim numbers and specific areas which have shown increases or decreases.
Conclusion
The UK government was criticised for a lack of communication with the insurance industry prior to changes in the Ogden rate and the way in which personal injury claims are processed. In hindsight, this was a mistake because the UK government should have tried harder to find some middle ground upon which all parties could agree. Despite promising UK consumers that any changes in the personal injury claims market would be “cost neutral” we have already seen leading lights such as Direct Line increase motor insurance premiums by an average of 6.6% in the first three months of 2017. We know the insurance companies have to make up some of the increased cost associated with the new Ogden rate but what about potential cost savings in relation to small personal injury claims and payout limits? Have these been ignored?
